Australian manufacturing in 2019 shows modest signs of positivity

The Australian manufacturing sector has recovered slightly in the first month of 2019 according to Australia Industry Group’s (Ai Group) Australian Performance of Manufacturing Index (Australian PMI).

The Australian PMI showed an upward tick of 2.5 points in January, ending on 52.5 points, in seasonally adjusted terms.

Readings above 50 points indicate expansion.

This was welcome news in the manufacturing sector, as a lacklustre showing in December 2018 ground 26 months of continuous expansion to a halt. December’s results returned a figure of 50 points, indicating neither contraction or expansion.

Six of the seven activity indexes in the Australian PMI showed improvement, with only finished goods showing a modest decline against the rest of the indices.

Issued by the Ai Group, the PMI measures perceived changes in activity levels across Australia’s manufacturing sector each month.

“2019 is clearly bringing a new set of challenges to Australian manufacturing,” said Ai Group Chief Executive Innes Willox. “The new orders index remains positive, but it is already below its long-run and recent averages, suggesting a slower period of growth lies ahead.

“Respondents continue to report problems with energy costs, shortages of specialist skills and fiercely competitive global markets. Locally, we are now also starting to see the effects flowing through into manufacturing of a weaker national construction cycle as well as the legacy of the drought.

“Recent changes in the finance sector are becoming relevant; for example, a number of manufacturers noted that difficulties obtaining customer finance is denting their business-to-business sales of certain types of specialist machinery and equipment.”

Promisingly, new orders and capacity utilisation improved, pointing to greater activity levels and a rosier outlook for business investment. Input prices index fell by 2.9 points to 70.3 in January, showing that high energy prices are having impacts on business bottom lines.

Margins also remain restrained as manufacturers have been unable to pass on rising costs on to customers.

The Industry PMI is a contrast from Ai Group’s Performance Services Index (PSI), which returned a seasonally adjusted score of 44.3. Commonwealth Bank’s Composite Purchasing Managers Index (PMI) showed a weak but noticeable improvement settling at 51.5, albeit at the slowest pace in three years.

The Ai Group said the manufacturing improvement was helped by firming demand from infrastructure, government and mining firms. Challenges such as finding suitable finance and skilled labour are ongoing, indicating tightening lending standards as spurred by the housing sector is having a flow-on effect.

The Reserve Bank of Australia also left the official cash rate on hold this month at 1.50%, its 29th consecutive month. Inflation is quite low at 1.8%.